Gold’s (XAUUSD) challenges amid Fed tightening

6 Ocak 2025

Gold’s (XAUUSD) challenges amid Fed tightening: Will it remain a safe haven?

Written by: Rania Gule, Senior Market Analyst at XS.com

Gold (XAU/USD) faces increasing challenges under the pressure of a strong U.S. dollar, which remains near its highest levels in two years, supported by hawkish statements from the Federal Reserve. While the price breached levels near $2,635, the neckline of a bearish head-and-shoulders pattern on the hourly chart, the decline can fundamentally be attributed to the continued strength of the dollar and market expectations of a slower pace of interest rate cuts in 2025. Despite these fundamental and technical factors pointing to potential weakness in gold, geopolitical tensions and global concerns continue to support it as a haven.

Recent economic data from the Institute for Supply Management (ISM) indicated improvement in the U.S. manufacturing Purchasing Managers’ Index (PMI), which rose to 49.3 in December, compared to 48.4 in November. These figures were better than expected, contributing to the strength of the dollar. I believe that the improvement in U.S. industrial activity strengthens economic forecasts, which in turn boosts the U.S. currency and increases pressure on gold. As the dollar rises, gold becomes more expensive for foreign investors, reducing demand for the yellow metal. However, positive economic expectations in the U.S. are pushing investors away from gold, which is typically seen as a hedge against economic downturns.

In my view, the Federal Reserve’s policy continues to play a pivotal role in influencing the price of gold. In December, the Fed decided to lower interest rates but signalled that the pace of the cuts would be slower than previously expected. This anticipated tightening from the Fed weakens the appeal of non-yielding assets like gold, as it doesn’t provide any returns compared to government bonds or bank deposits. Consequently, investors are increasingly turning to assets that offer higher returns in a rising borrowing cost environment, which poses a negative threat to gold and limits its appeal.

On the other hand, gold benefits from limited support from other factors such as ongoing geopolitical tensions in the Middle East and the ongoing Russia-Ukraine conflict, which create uncertainty that boosts demand for gold as a safe haven. Additionally, central banks around the world continue to purchase gold at high rates.

These banks are expected to remain gold buyers in 2025, with purchasing levels approaching 8 million ounces. This large demand, in my opinion, contributes to higher gold prices and tightens market supply, further enhancing its value. The gold-buying policy of central banks reflects their desire to diversify their foreign exchange reserves, making them less vulnerable to fluctuations in global financial markets. Therefore, these purchases remain one of the main factors supporting gold prices in the long run.

However, it is important to acknowledge that gold continues to face pressures from economic factors. The increase in U.S. bond yields due to interest rate hikes may make gold less attractive compared to other financial instruments offering higher yields. Yet, markets anticipate limited impact from future interest rate cuts, which could keep selling pressures on the yellow metal. Therefore, I expect prices to remain subject to ongoing volatility, with fluctuations driven by the interaction of economic and geopolitical factors.

In conclusion, the future of gold remains uncertain, influenced by some conflicting factors. On one hand, gold remains strong as a haven amid global tensions and geopolitical uncertainties, in addition to significant purchases from central banks. On the other hand, pressure from the strength of the U.S. dollar and expectations of higher bond yields are growing. As these contradictory factors persist, gold is likely to enter a phase of continuous volatility, with noticeable price fluctuations based on developments in U.S. monetary policy and geopolitical events.

Technical Analysis of Gold (XAUUSD) Prices:

Gold (XAU/USD) is showing intriguing technical movements at the moment, continuing to face challenges at both resistance and support levels. This is particularly evident as increased stimulus from Chinese authorities supports prices. The People’s Bank of China (PBOC) has pledged to intensify financial support to boost economic growth through technological innovation and consumption stimulation, which fuels optimism about improving gold demand in the Chinese market, the world’s largest consumer of gold.

Additionally, China’s services PMI has risen to a seven-month high, further enhancing economic optimism and supporting demand for gold. These factors suggest that prices may continue to improve if the economic optimism in China persists in the medium to long term.

Gold – XAUUSD –   Prices Chart -XS.com

Technically, gold prices (XAU/USD) face resistance near the 50-day Simple Moving Average (SMA) at $2,651. However, the price has broken below the support provided by the 21-day SMA at $2,638 and also breached the neckline of the bearish head-and-shoulders pattern at $2,635. These levels are key indicators in determining gold’s next direction.

Markets remain cautious, as sustained declines below the 21-day SMA could push the price to test the 100-day SMA at $2,627. If a downward move occurs below this level, the market may witness further declines, including a test of last week’s low at $2,596.

In summary, gold (XAU/USD) is facing short-term bearish pressure, with any downside move likely to find strong support around the 100-day SMA near the $2,625 zone, potentially limiting further losses. However, a break below this support could push the price toward $2,600, and if negative momentum persists, the decline may extend to the monthly low at $2,583, reinforcing the bearish trend.

On the upside, a break above the $2,647 resistance could push gold prices toward $2,665, with further upward momentum potentially leading to the $2,681-$2,683 range, before testing the key psychological barrier at $2,700. A clear break above this level would strengthen the ongoing bullish trend.

Support Levels: $2,625 – $2,600 – $2,583

Resistance Levels: $2,647 – $2,665 – $2,700

 

Zaid Barem / YMM